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June 6, 2012

Spanish Industrial Output Falls

German, Austrian banks cut; gold sales up as ECB keeps rates steady

A stock board in Germany. (Photo: AP)

The news for Spain just kept getting worse on Wednesday as its industrial output fell the most since October 2009, surprising economists who had not expected such a severe drop. Moody’s downgraded seven of Germany’s banks and three Austrian lenders, citing the debt crisis, and gold was revealed apparently to have regained its luster for, among others, the billionaire investor George Soros, who had called it the “ultimate asset bubble” in January 2010.

Meanwhile, the European Central Bank (ECB) was expected to cut interest rates, but instead left them unchanged at 1%.

Bloomberg reported that Spain’s industrial output was shown to have dropped by 8.3% in April from a year ago, according to the National Statistics Institute in Madrid. Bloomberg economists had predicted a median drop of 6.5%. In March output for factories, refineries and mines dropped 7.5%.

Domestic demand is expected to shrink by 4% in 2012, according to the government; that’s four times the rate at which it contracted in 2011. Spain is Europe’s fourth largest economy and is already battling a crisis with its banks.

Germany came in for its own troubles when Moody’s cut seven of its banks’ ratings. Commerzbank saw its rating cut by one level, to A3, with five other German banking groups cut as well. In addition, the local subsidiary of UniCredit, Italy’s biggest bank, was also downgraded. Moody’s said that its review of Deutsche Bank was not yet concluded; as a result, it took no action.

Three Austrian banks were lowered as well, with UniCredit Bank Austria and Raiffeisen Bank International dropped one level each, to A3 and A2, respectively; Erste Group Bank lost two levels and is now at A3.

In a statement, Moody’s attributed its actions to “the increased risk of further shocks emanating from the euro area debt crisis, in combination with the banks’ limited loss-absorption capacity.”

Sandy Mehta, CEO of Value Investment Principals, a Hong Kong-based investment advisory company, characterized Moody’s actions as “a bit harsh.” However, he was quoted adding, “But given the events in Europe, unless the authorities and the powers that be are more decisive and take firmer action, then you do have the risk that the economic problems will engulf Germany as well.”

Moody’s isn’t the only business concerned about the state of Germany’s banks. A presentation circulating on Tuesday from Carmel Asset Management posited that Germany could be the next country in financial trouble, since it has taken on so much of the eurozone’s debt—and either a Greek exit from the eurozone or the preservation of the joint currency would cost Germany dearly, with the former being far more costly.

The Carmel presentation indicated that bailing out the eurozone to keep it intact, a move Soros characterized on Saturday as resulting in “a German empire with the periphery as the hinterland,” could cost 579 billion euros ($720 billion). Think that’s expensive? Carmel puts the price tag of a eurozone collapse for Germany at $1.63 trillion—including bank losses, bailout costs and lost exports.

Since a Tuesday poll reported by Reuters indicates that more Germans want Greece to leave the eurozone than want it to remain, it could prove to be a very pricey choice. Nearly half of those responding to the survey, 49%, prefer that Greece depart the joint currency, while only 39% want it to stay. A third of Germans surveyed are also reluctant to vacation in Greece, and nearly two-thirds say they cannot understand why Greeks would vote for anti-austerity measures.

And speaking of Soros, he has been buying gold since the beginning of the year. After calling it a bubble in 2010, his Soros Fund Management more than tripled its investment in the SPDR Gold Trust in the first quarter this year to 319,550 shares now valued at $48.5 million, according to a May 15 SEC filing. In 2011 it held as few as 42,800 shares, and at the end of 2009 as many as 6.2 million.

Soros is not the only one. Despite gold’s fall from its peak in 2011, Paulson & Co. holds some 17.3 million shares in the SPDR Gold Trust, now valued at $2.62 billion, as of an SEC filing on May 15. International Monetary Fund (IMF) data indicate that central banks steadily added to their stores of gold over the 14 consecutive months ending in March, which is the longest such streak since 1964. Investors have been snapping up gold coins, too, with demand accelerating.

Although gold has been in a slump with the intensification of the debt crisis, as investors have sought out dollars as liquidity hedges, there is still an expectation that gold will soar again. Much hinges on the result of the next Greek elections.

“Gold remains the currency of last resort,” Jeff Currie, the New York-based head of commodity research at Goldman, said in the report. Goldman predicts a gold price of $1,840 by the end of the year. “The case for higher gold prices remains intact.”

And Michael Widmer, an analyst at Bank of America Merrill Lynch in London, who predicts a fourth-quarter average of $1,875, was quoted saying, “Gold is still going to $2,000 an ounce this year. It’s just going to take a little bit longer to get there.”

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